So the actual matter of concern is the work of government spending. Usually the increase in public expenditure causes fiscal deficit which disfigure the economy. Governments take different measure to reduce fiscal imbalances like cut in development expenditure, subsidies and social spending which affects the welfare. If the reduction in fiscal deficit is a matter of concern then the government can reduce fiscal deficit by increasing productivity and growth rather hen reducing expenditure.
When the Central Bank uses expansionary monetary policy, the money supply increases whilst the interest rates fall. This is because when money is readily available in the economy due to monetary expansion, the interest rates will fall due to the fact that people will be more willing to make loans as oppose to taking out loans. Reduced interest rates will cause domestic financial and capital assets to become less attractive as a result of their lower real rates of return. In addition to this, foreigners will reduce their position in domestic bonds, real estate, stocks and other assets. The financial account with deteriorate as a result of foreigners holding fewer domestic assets.
The international trade effect is change in net exports caused by the change in price level. For example, when the price level a country A lowers, its goods and services becomes cheaper to foreign countries. This will cause other countries to buy more goods and services from country A, thus increasing net exports. Conversely, when its price level rises, its goods and services become more expensive to foreign nations, thus reducing the quantity of goods and services other countries buy to country A and resulting in a reduction in net exports. Additionally, the change in price level does not only affect the quantity of goods and services demanded by other nations, but to the consumers in country A as well.
This includes sales of unfinished products used throughout the production and production chain. The PPI can serve as a principal indicator of definitive price changes at the consumer level, and of inflation if the trend in the PPI is higher. Low inflation is good for stimulating consumer spending, corporate profits and, ultimately, the stock market. The rise in inflation can be a sign of an overheated economy and potentially higher interest rates. On the other hand, the PPI can give analysts, business executives, and investors with information on price trends at various stages of the production process.
Its causes could be triggered by the private sector and the government spending more than their revenues, or by shortfalls in output. Price increases could also be triggered by increases in costs of production. For instance increases in prices of imported raw materials will cause inflation if not managed. Whatever the initial cause, inflation will not persist unless accompanied by sustained increase in money supply. In this sense, inflation is a monetary phenomenon.
Thirdly, the prices of raw material also will influenced the inflation. For example, if the key inputs such as increase in the price oil, producers have to adjust the output supply or increase the price of the outputs in the market in order to overcome and cope with the rising price oil. When output decline and the price of the output rise, the cost push inflation occurs. Moreover, if the firms become less productive, it allows costs to rise and invariably leads to higher prices. This is because firm used a lot of time to produce the products.
Explain the short and long term effects resulting from a country’s currency depreciating. A currency depreciation will have both short and long term effects. In the short term, the exchange rate will cause a country’s exports to appear cheaper, thus also increasing the demand for those exports. Likewise, it will also make imports more expensive and reduce the demand. In the long term, the depreciation can lead to increased assumed demand, pushing economic growth.
However, what happens if the resources all of a sudden become scarce and there is a shortage? How does this affect the state of the economy? Firstly, if certain resources become scarce, the price of the remaining supply will go up. In order to try to recoup losses, the prices of resources that the producers have to purchase to create products will increase. This in essence will throw off the entire flow and stability of the economic system.
• A rise in the price level reduces the real value of people’s income and wealth and hence decreases their ability to consume. • Higher prices increase people’s and firms’ demand to hold money for transactions purposes. This increase in the transactions demand for money is likely to raise the rate of interest and thereby reduce demand for consumer goods (consumption) and demand for capital goods (investment). • An increase in the general price level will make domestic goods and services less competitive against foreign goods and services. This will reduce demand for domestic products from both domestic and foreign consumers.
Budget constraint of public may also shrink more then in order to tackle this problem then govt print excess supply of notes / money and when any extra money is created in economy It will increases the buying power of people . The role of inflation in the economics is found to be cause of decline in the value of money, Inflation is another macroeconomic problem which also hurts the economic indicator of Pakistan. Inflation has also a negative impact on economic